Fordyce v. Omaha, Kansas City & E. R. R.

PHILIPS, District Judge. After the foreclosure sale and the confirmation thereof to the purchaser, various creditors of the mortgagor companies filed intervening petitions to have their respective claims declared preferential in character, to be paid out of the proceeds of the sale under the foreclosure proceedings, or as a lien upon the corpus of the property in the hands of the purchaser. These matters were referred to Shannon C. Douglass, as special master, to take the proofs and report his findings 'on the facts and the law. To his reports in the cases several of the interveners have filed exceptions, which have been heard by the court. The master’s reports are most comprehensive and thorough, exhibiting great care and an intelligent understanding of the issues and the law of the case. His collection and review of the decisions bearing upon the question of preferential •claims is a valuable contribution to that branch of judicial literature. His conclusions on the law are based upon the following propositions, ■as applied to the character of these claims: (1) To constitute them preferential over the mortgage, which covered not only the corpus of the railroad property of every kind and description, but also the net income after deducting current operating expenses, the debts must have been contracted upon the faith of being paid from such current income, and not created for construction or ordinary equipment. (3) Where there is no proof showing a diversion of such current income to the use or benefit of the mortgagee, and there is a deficit of the net income arising from the operation of the road in the usual businesslike way, and the property under foreclosure sale brings less than the mortgage debts, no equity exists in favor of such general creditors over the mortgagee, entitling them to be recompensed out of the purchase money, or to subject the corpus of the property in the hands of the purchaser to the payment of such debts. The master further held that, to entitle the interveners to the enforcement of their alleged preferential claims, it devolved upon them to show by evidence that there had been a diversion to the benefit of the mortgagee of net earnings after deducting such current expenses. As a general proposition, I understand this to be a correct exposition of the law as applied in this jurisdiction. Illinois Trust & Savings — 555 — Bank v. Doud et al., 105 Fed. 123, 44 C. C. A. 389, 52 L. R. A. 481; Atlantic Trust Co. et al. v. Dana et al., 128 Fed. 209, 62 C. C. A. 657; Kansas Loan & Trust Co. v. Electric Railway Co. (C. C.) 108 Fed. 702. This ruling is supported by both the weight of authority and reason. Rhode Island Locomotive Works v. Continental Trust Co., 108 Fed. 5, 47 C. C. A. 147; Lackawanna Iron & Coal Co. v. Farmers’ Loan & Trust Co., 176 U. S. 298, 20 Sup. Ct. 363, 44 L. Ed. 475; International Trust Co. v. Townsend Brick & C. Co., 95 Fed. 850, 57 C. C. A. 396; Gregg v. Mercantile Trust Co., 109 Fed. 220, 48 C. C. A. 318; Gregg v. Metropolitan Trust Co., 124 Fed. 721, 59 C. C. A. 637, affirmed in 197 U. S. 183, 25 Sup. Ct. 415, 49 L. Ed. 717; Niles Tool Works Co. v. Louisville, N. A. & C. Ry. Co., 112 Fed. 561, 50 C. C. A. 390; Wood v. Guaranty Trust Co., 128 U. S. 416, 9 Sup. Ct. 131, 32 L. Ed. 472; Cutting v. Tavares, O. & A. R. Co., 61 Fed. 150, 156, 9 C. C. A. 401; Hunt v. Memphis Gaslight Co., 95 Tenn. 143, 144, 31 S. W. 1006; Mersick v. Hartford, etc., Ry. Co. (Conn.) 55 Atl. 664, 668, 669, 100 Am. St. Rep. 977. It may be conceded that there are expressions in opinions of the Justices of the Supreme Court that certain exceptions should be made, under special circumstances, to the general rule requiring proof of such diversion. It may also be conceded that exceptions at-times have been, and doubtless should have been, made, ex necessitate, in cases of imperious business necessities, such, for instance, as the payment of balances on traffic arrangements between the bankrupt: and another road, to prevent disruption of the traffic, to the serious detriment of operating the business under the receivership; also, in case of seizure under prior attachment or execution against the bankrupt road, where, good judgment would authorize the court to direct the payment of the lien, or where the necessity of continuing a supply contract is supreme, and its continuance should be conditioned upon paying antecedent claims under the contract, and the like. But no such contingency or administrative policy is presented in the instance of any claim in this, record. There are some other settled rules of law applicable to nearly all of the intervening claims which may here be stated: (1) The fact that the court, in the order appointing the receiver, may have directed that preferential claims, for supplies and materials be paid out of the proceeds of the sale or the corpus of the property in the hands of the purchaser does not control the right of the purchaser to contest such claims on the grounds that they are subordinate in right to that of the prior mortgagee. Louisville Railroad Co. v. Wilson, 138 U. S. 501, 11 Sup. Ct. 405, 34 L. Ed. 1023; Gregg v. Mercantile Trust Co., supra; Monsarrat v. Mercantile Trust Co., 109 Fed. 230, 48 C. C. A. 328. (2) In some of the claims counsel for interveners have attempted to show diversions prior to the creation of the debts Sought to be enforced as an equitable lien. This court in Kansas Loan & Trust Co. v. Electric Railway, etc., Co. 108 Fed. 703, said: “This intervener 1ms nothing to do with the earnings of the road or their diversion by the road prior to the creation of its debt. The creditor can only — 556 — concern himself about diversions of the current earnings after the creation of his debt.” In Central Trust Co. v. East Tennessee Ry. Co., 80 Fed. 624, 626, 26 C. C. A. 30, Judge Lurton said: “Prior to the period covered by the maturity of appellants’ claims, there was a surplus of gross earnings over all operating expenses; but it cannot be contended that the company was under any obligation to future creditors to accumulate a surplus to meet possible deficiencies in the income to meet future income debts, or that it was improper to apply such surplus in payment of interest.” (3) Stress is placed in argument in respect of expenditures for machinery, repairs, and improvements made on what is known as the “Quincy Division,” operated by the Eastern road under a contract of lease; that the leased line had become so out of repair by reason of original imperfect construction and wear and tear that in the year preceding the appointment of the receivers in the original suit the railroad commissioners of the state had pronounced it unsafe for public use, and directed that the roadbed and some of its bridges be placed in necessary repair within a given time. Further stress is laid upon recitals contained in a petition by the receivers to the court, asking permission to issue receiver’s certificates to raise money for making such repairs, etc.; the argument based thereon being that such material and work were essential to keep the road a going concern, and therefore the debts created for the machinery, etc., furnished to aid in thus improving the condition of the road should be held preferential,- irrespective of whether there was any diversion of net income. In the first place, it is to be kept in mind that when all this occurred the mortgagee was not in court. It did not become a party to the proceedings in which the receivers were appointed until December 1, 1901, when it appeared and filed its cross-bill. Any statements made by the receivers in said petition, and any adoption of the expressions of the receivers in the order of court, were, as to the mortgagee not a party to the proceeding, entirely ex parte, and could not be, as against it, evidence of the facts recited. Aside from this, the law is, as declared by the Court of Appeals of this circuit in Atlantic Trust Co. v. Dana, 128 Fed. 209, 62 C. C. A. 657, that the right of the intervener as against, the mortgage lienor to have such claims declared preferential, to be enforced upon the^corpus of the property in the hands of the purchaser under the foreclosure sale, is to be regarded as a debt not authorized or sanctioned by the mortgagee. (4) Nor can the fact that the mortgagee, after its right accrued to enter as for condition broken, failed to exercise it, be construed into an equitable estoppel on the ground of its acquiescence in the expenditures made as equitable liens created by the mortgagor, or the receivers appointed by the court when the first mortgagee was not a party thereto. The only effect of the nonaction of such prior lienor is to preclude it from laying any claim to the current income accruing prior to its cross-complaint, which may have been used or diverted, to which such lienor might have asserted claim. Atlantic Trust Co. et al. v. Dana, supra; Mersick v. Hartford, etc., Ry. Co., supra. — 557 — (5) Further, the law is that, although the equipments and repairs augmented the mortgage security, it does not affect the question of the right of the interveners to the asserted preferential lien. Rhode Island Locomotive Works v. Continental Trust Co., supra; International Trust Co. v. Townsend Brick & C. Co., 95 Fed. 850, 37 C. C. A. 396; Illinois Trust Co. v. Doud, 105 Fed. 148, 44 C. C. A. 389, 52 L. R. A. 481. The master has found as a fact from the evidence before him that there was no diversion of the net income derived by the receivers from the operation of the road to the use of the mortgagee, for the palpable reason that after the most liberal allowances for all claimed diversions for improvements to which an equitable lien could attach there was no surplus income. The law is that the master’s report upon matters of fact is deemed to be true where no exceptions are properly taken thereto. And even where an exception is taken, the conclusions of the master on questions of fact, on conflicting evidence, if any, are presumptively correct, and will be adhered to by the court on review unless it appears to be palpably wrong by the most persuasive weight of evidence. Growing out of these rules in such procedure, exceptions, when taken, must not be to the general result, as such would be but iu the nature of a general demurrer. The exceptions must be specific, pointing out the particular errors relied upon, and where they are based upon particular evidence contradicting conclusions of the master they should refer to the evidence in the record where the same may be found, and not leave the court to grope through voluminous records of testimony, as in this case, running into thousands of pages, to find, as best it may, where the evidence relied on may be found. Chief Justice Marshall, in the early case of Harding v. Handy, 11 Wheat. (U. S.) 103-127, 6 L. Ed. 429, said: “It may be observed, generally, tliat it is not the province of a court to investigate items of an account. The report of the master is received as true when no exception is taken, and the exceptions are to be regarded so far only as they are supported by the special statements of the master, or by evidence, which ought to be brought before the court by a reference to the" particular testimony on which the exceptor relies. Were it otherwise, were the court to look into the immense mass of testimony laid before the commissioner, the reference to him would be of little avail. Such testimony, indeed, need not be reported further than it is relied on to support, explain, or oppose a particular exception.” Mr. Justice Clifford in Greene v. Bishop, 1 Cliff. 186, Fed. Cas. No. 5,763, after adverting to the above statement of Chief Justice Marshall, said: “But the evidence ought to be brought before the court by reference to the particular testimony on which the excepting party relies.” Speaking of the exception he said: “It merely alleges lhat the finding of the master is erroneous and unsatisfactory, without attempting or pretending to specify any particulars in which the error consists. * * * and omits altogether to refer to any portion of the testimony to support the allegation.” — 558 — In Jaffrey v. Brown (C. C.) 29 Fed. 476, 479, the court said: “Tbe exceptions are to be regarded so far only as tliey are supported by tbe special statements of tbe master, or by evidence which ought to be brought before the court by a reference to the particular testimony.” In Jones v. Lamar (C. C.) 39 Fed. 585-587, the court said: “Solicitors for the complainants say that they are unwilling to rely solely upon the evidence referred to by the master as the basis of his findings, and since they have' specified nothing else, and since the court, under the rule in Harding y. Handy, supra, will not consider testimony in support of the exceptions not referred to in the report of the master, or brought to its attention by appropriate reference in the exceptions, exceptors are unable to proceed.” See, also, Farrar v. Bernheim, 74 Fed. 435-438, 20 C. C. A. 496. In .fact the exceptions in these cases do not even directly charge-that the master has improperly reported the facts. But again and again, with unusual reiteration, it is simply charged that the master erred in finding that there was no net income, or that there was no diversion, dr that the claim was not preferential, and the like, and that he should have found otherwise, without claiming that his finding is not supported by evidence; and by pointing out where the court will' find the particular fact or facts relied on. In such condition of the record the court would be justified in accepting the master's findings of the facts as correct. Nevertheless, the court, in certain instances, has had recourse to the record, and read the evidence, although it has-occasioned great inconvenience and labor, bearing upon particular questions of fact, to determine whether they justified a different finding from that of the master. Claim of Receivers of the Gulf Company against the Eastern Company. The receivers of the Gulf Company, on December 30, 1899, recovered a judgment 'against the Eastern Company for $24,738.78, including interest, upon an account against the Eastern Company accruing prior to the receivership. As found by the master, the greater portion of this claim consisted of the proportionate part of joint expenses paid by the Gulf Company. The Eastern, Northern, Omaha, and Gulf Companies were operated as one system. The expenses of cheir general.offices and other departments were, in the first instance, paid by the Gulf Company,, and by a system of bookkeeping a charge was made upon some basis against each compan}'- which was a part of the system. Other items were for repairs to cars and locomotives and car supplies, the principal items being for rental of locomotives. There was also a cla-im, not included in the judgment, for $118.89 for stationery and telegraph bills due from the Eastern Company to the Gulf Company. The court is strongly inclined to the opinion that, under the facts found by the master touching the relations between the Gulf Company and the Eastern Company, the method of their management and operation, under the master mind of Mr. Stilwell, making , them one system in fact, in connection with the manner of the bookkeeping and the adjustment of accounts at stated periods, the carrying of balances and charging the same to a general account, — 559 — the Gulf Company was and is in no position to claim that the credits were extended upon the faith of the application to their payment of the current earnings of the Eastern Company, and therefore they are wanting in the first quality of a preferential claim. The following authorities bear upon the law of the case: Thomas v. Western Car Co., 119 U. S. 95-112, 13 Sup. Ct. 824, 37 L. Ed. 663; Penn v. Calhoun, 121 U. S. 251, 7 Sup. Ct. 906, 30 L. Ed. 915; United States Trust Co. v. Western Contract Co., 81 Fed. 454, 26 C. C. A. 472; Morgan’s Louisiana & Texas Railroad, etc., Co. v. Texas Cent. R. Co., 137 U. S. 171, 11 Sup. Ct. 61, 34 L. Ed. 625. The court approves the findings of the master that the items of the judgment for the rental of the locomotives and expenses advanced in maintaining a joint system of officers and offices' are not preferential, as shown by the following authorities: Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339; Kneeland v. American Loan & Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, 34 L. Ed. 379; Thomas v. Western Car Co., supra; Rhode Island Locomotive Works v. Continental Trust Co., supra; Morgan’s Louisiana & Texas R., etc., Co. v. Texas Cent. R. Co., supra; Contracting & Building Co. v. Continental Trust Co., 108 Fed. 1, 4, 47 C. C. A. 143. The court also approves the findings of the master that the claim of intervener touching the matter of the payment of interest prior to the appointment of the receivers did not constitute a diversion, and was not preferential in its character. The matter of purchase of ballast cars and ballasting and work done on the Quincy Division will be more particularly discussed when we come to the consideration of the claim of the Rodger Ballast Car Company. It is sufficient here to say that the contention of counsel for the Gulf Company that this purchase and work should be regarded as of the nature of original capital, or a construction which should be accounted for, although not paid for by the Eastern Company, should not be recognized. The analysis made by the master of the whole evidence touching the issue of any actual surplus of net earnings clearly demonstrates that, considering all outlays which might have been characterized as diversions, there-was a large deficit of net income after deducting the operating expenses. The evidence furthermore shows that in order to keep the road a going concern the bondholders made large advances to its operators. It results that the exceptions are overruled. The Claim of the Texarkana & Southern Company; also Claim of Knott & Swinney, Receivers of the Kansas City Suburban Belt Railway Company. The court perceives nothing worthy of review arising on the exceptions in this case, and the findings of the master are approved, and the exceptions are overruled. Claim of the Rodger Ballast Car Company. This claim is predicated of the purchase price of 33 ballast cars, one plow car, and for freight charges thereon, shipped to the Eastern — 560 — Company, and accepted in November, 1899. This claim was urged before the master in the first instance upon the theory that they were preferential in their character, and should be allowed regardless of the question of fact as to whether or not there was any diversion of ■net income under the receivers. The intervener, concluding ultimately to attempt to show a diversion, introduced in evidence books of account of the Eastern Company, and examined its auditor and chief engineer. The result of the -book account showed that the expenses of operation of the road under the receivership from January 2, 1900, and including June 23, 1903, amounted to $1,313,538.31, and that the total earnings were $1,122,281.63, leaving a deficit of $191,256.68. The only oral testimony introduced by the intervener on this branch of the case was that of Collins, the chief engineer, and Kendrick, the . auditor of the receivers. In the first place, the intervener’s debt having been contracted prior to the intervention of the mortgagee by cross-bill, and the work on the Quincy Division, where the supplies were used, having been furnished under contract of purchase prior to said intervention, how stands ■ this claim ? The ballast cars purchased were merely for facilitating the work of hauling and- distributing the ballast along the railroad for improving the track. The cars' were not the ballast itself, essential to placing the track in proper and suitable condition for successful operation. They were mere vehicles — cars conveniently constructed — for hauling ballast from one point to another, whereby it may be conceded that the work of such ballasting was facilitated or expedited. In this respect how does it differ, as affecting the right of preference over the mortgage, from an engine or other car bought to assist in the better operation of the railroad work, whereb}'- its business could be better done and its income augmented? Debts contracted for such adjuncts and equipments to railroads do not necessarily constitute a claim preferential to that of the mortgage upon the corpus of the property or the current income covered by the mortgage. Lackawanna Iron & Coal Co. v. Farmers’ Loan & Trust Co., 176 U. S. 298, 20 Sup. Ct. 363, 44 L. Ed. 475; Southern Railway Co. v. Carnegie Steel Co., 176 U. S. 257, 20 Sup. Ct. 347, 44 L. Ed. 458; Rhode Island Locomotive Works v. Continental Trust Co., supra; Illinois Trust & Savings Bank v. Doud, supra. As already shown, the fact that the equipments augmented the security does not alter the case. Rhode Island Locomotive Works v. Trust Co., supra; International Trust Co. v. Townsend Brick & C. Co., supra. It being conceded that prior to appointment of receivers there was no net income, to give the intervener the relief sought it devolved upon it to show that after the creation of its debt, and during the operation of the road under the’ receivership, they diverted to the use or benefit of the mortgagee a part of the net income of their earnings in the operation of the road, which in equity should have been applied to the payment of its claim. To meet the result, as shown by the books of the company above stated, objection is made to the item of $51,000 on the credit side of the account of expenditures, which represents the amount of receiver’s certificates issued under the authority — 561 — of the court. The contention is that the receivers should have charged themselves with the amount realized on such certificates, which is not shown by the debit side of the account. It is suggested by counsel for the purchasing company that from all that appears from the evidence this $51,000 might have been included in the item under the head of earnings “All Other Sources,” $83,816.74. As there was no evidence showing the constitutent elements of the “all other sources,” the presumption might be indulged that the receivers kept an honest account, and charged themselves with the proceeds of the receiver’s certificates, and that without more it ought to be assumed that this is embraced within “all other sources.” But, waiving this, deducting the $51,000, there would still remain $141,256.68 of expenditures over earnings. The next contention of intervener is that the item of credit of $101,-483.52 of expenditures for rentals paid on the lease contract of the Quincy road should be deducted as a diversion. The court can perceive no reason why this contention should obtain. Long prior to the extension of the credit of the Eastern road, the lease contract between it and the Quincy road was made. The rentals paid were in fulfillment of that contract. The lease having been taken over and recognized by the receivers, the contract became obligatory upon them until repudiated. Central Trust Co. v. Continental Trust Co., 86 Fed. 517, 528, 30 C. C. A. 235. In that case the court said: “When a lease of part of a line of railroad has been adopted by the receiver and the court, the rent should be paid as an operating expense.” And in Mercantile Trust Co. v. Farmers’ Loan & Trust Co., 81 Fed. 254-258, 26 C. C. A. 387, the court said: “If the court below properly accepted and adopted the leases, the rentals reserved under them became an integral part of the operating expenses of the trust estate in the hands of the receivers, as much as the wages of the hired men, the rent of leased engines or cars, the traffic balances due connecting railroads, or any other ordinary expense of operation.” In no proper legal sense was such rental payment a diversion in favor of the mortgagee. The master properly found that the repairs of bridges for the maintenance of the Quincy road constituted a part of the rental provided for by the lease, and, as such, they were necessary operating expenses. The credit side of the account shows an item of “equipment notes” $39,362.93. The settled law of this jurisdiction is that such items are classed as operating expenses, and do not constitute diversion in favor of the mortgagee. The oral evidence introduced shows that the ballasting, was 33 miles upon the Eastern road and 60 miles on the Quincy Division; one-tenth of which was full ballast, at $1,650 per mile, and nine-tenths was one-half ballast, at $3,000 per mile. It does not appear from the evidence on what particular road this one-tenth of full ballast was applied. In any event, not over one-tenth can be regarded as new construction, and the nine-tenths was merely repair work. The item of charges for work on bridges was on the Quincy Division, and was of the nature of repair work. There were some water tanks destroyed by fire which were rebuilt, and perhaps one — 562 — new one built, and there was $±,050 expended on the construction of a spur road, and other claimed new constructions, amounting in the aggregate to $8,300. These were expended on and in connection with the Quincy branch of the railroad. It is in the first place very questionable as matter of law whether these expenditures, which inured to the benefit of the Quincy Division and not to that of the Eastern Company, covered by the mortgage, could be said to have inured to the benefit of the mortgagee; or, in other words, whether or not the diversion, if any, could be charged to the Eastern Company. In St. Louis, Alton, etc., Railroad Co. v. Cleveland, etc., Railway Co., 125 U. S. 658, 8 Sup. Ct. 1011, 31 L. Ed. 832, where the question was between claims of a preferential character and the bondholders under a second mortgage, the court said: “It cannot be said that the application of earnings to tbe payment of the interest on the first mortgage bonds is chargeable to the holders of the second and third mortgage bonds; the latter alone are interested in the fund for distribution. That fund, in tbe sense of the rule sought to be applied, cannot be said to have been benefited by the payment to other bondholders from the gross earnings applicable to the payment of the rent. The equity of the petitioner, if in fact it exists, is against the holders of tbe first mortgage bonds, who have actually received the money to which it claims to be equitably entitled. * * * As we have already stated, no equity can arise upon the alleged breach of trust unless the second and third mortgage bondholders participated in it, or have been benefited by it.” The only answer to this is the suggestion that, inasmuch as the Eastern road had an option under the. lease contract to purchase the Quincy line, it had an indirect interest in making the betterments on the leased line. This, however, would only be, at the most, prospective and contingent, which was never realized, and in no wise conferred a present benefit on the mortgagee. The bare expectation in no degree augmented the mortgage security. Independent of these considerations, conceding that certain items of expenditures on the Quincy road should be deducted from the credit side of the account, there'would still remain a large deficit in the current earnings under the receivership, arising from operating expenses. Before the intervener can charge the corpus of the property in the hands of the purchaser with the payment of its claim, the burden is upon it to show that but for such diversion there would have been a net surplus of earnings subject to the equitable lien. The law only exacts that the amount of the diversion shall be restored by the mortgagee receiving it for the benefit of those entitled thereto. So that if its restoration still left a large deficit in the net earnings in the operation of the road, there would be no subject-matter upon which the equitable lien could attach. Furthermore, the proof is that the contract of lease, under direction of the court, was surrendered by the receivers, and the property was surrendered to the Quincy Company prior to the decree of foreclosure, and therefore no possible benefit inured to the mortgagee from any improvements made thereon. It results that the exceptions must be overruled. — 563 — Claim of Continuous Rail Joint Company. This claim amounts to $2,799.46 for rail joints purchased in November, 1899, by the Eastern Company and used upon its road. Conceding that this was an operating expense contracted upon the faith of the earnings of the company, proof of diversion for the benefit of the mortgagee is essential to the relief. The only evidence thereof, in the first instance, was under the stipulation that the testimony taken in the case of the Rodger Ballast Car Company should be used. After-wards it was stipulated between counsel as follows: “That all evidence tending to prove or disprove a diversion, if any, offered by or against any of the intervening petiiioners in this case who have iiled claims against the Eastern Company, shall be considered as offered in evidence in the matter of this intervening petition, and made a part of the record, subject to such orders as may be made as to costs.” On this state of the record counsel for intervener bases a claim of diversion upon the fact of payment prior to the receivership of rentals on the lease of the Quincy Company, in the form of interest on certain bonds of that company. The master found and held that the theory of liability where there has been no diversion of earnings is that the mortgagee received a benefit in the way of the payment of interest or for the betterment of his property; that the fact that some other road or some other bondholders received such benefit is no reason why the property of the Eastern Company should be charged with the amount of the diversion as against the mortgagees, who received no benefit therefrom. In addition to this, the payment of such interest was a part of the consideration of the rental contract, and, as stated under the foregoing ruling, would be a part of the operating expenses. The master has found that there were at no time any net earnings that were or could have been paid on the interest upon the bonded debt of the Quincy Company, as there were no such net earnings. The master also further found that prior to the receivership no payments on account of lease rentals were made either from the gross or net earnings of the Eastern Company or from its funds; that the same were made by the construction company, and by it charged to the Eastern Company in its unpaid open accounts, heretofore referred to. The total amount actually paid as rentals in the form of interest upon bonds of the Quincy Company was $124,000, although the total indebtedness incurred for the lease rentals was $210,344.68. The loss in operating expenses over earnings prior to the receivership was in excess of $351,000, making $140,191 in excess of all liabilities inctirred for lease rentals, and over $227,000 in excess of the amount of interest paid upon the bonds of the Quincy Company. Super-added to this, the master finds the fact to be that prior to the receivership $228,480.11 was advanced in loans of money to the Eastern Company by those interested in marketing its bonds. The analysis of these accounts and the deductions made therefrom by the master demonstrate beyond any question that there were no net earnings applicable to the payment of this claim. This claim originated November 7, 1899. Between that date and the appointment of the receivers there were no payments by the Eastern Company for interest upon — 564 — its own or the bonds of the Quincy road, or for lease rentals, or for the benefit of the mortgage bondholders., As already shown in the foregoing part of this opinion, it is a matter of no concern to this intervener what payments were made prior to the origin of its account. The master has found that the $15_,000 claimed by the intervener to have been paid for lease rentals in November, 1899, was not paid by the Eastern Company, but was paid by the construction company,- and charged in the open account. Further claim is made by intervener that $15,943.65 was paid for new locomotives in October, November, and December, 1899. The master has found that of this amount $5,990 was paid October 31, 1899, prior to the origin of the •intervener’s account, $6,500 in notes, and the balance, amounting to $3,643.65, consists of items, $3,000 of which went into equipments, and the $3,643.65 was more than reimbursed by advances in borrowed money, and was far less than the loss in earnings. The sum of $14,054.68, claimed to have been paid in October and November, 1899, to the Pullman Company, was for equipments, and the master has found that this was not paid out of the current earnings, but upon drafts on the construction company. The other items claimed to have been diverted were for equipments, for maintenance, and repairs on the Quincy line. I can find no reason in fact or law for setting aside the findings and conclusions of the master respecting this claim, and the exceptions are therefore overruled. Claim of E. A. Kinsey Company. This claim is for $990. The master has found that this sale was made to the Omaha Company, and credit extended to it, and that in the accounts between the Omaha and the Eastern Companies one-half of this amount was afterwards charged to the Eastern Company, because material to that extent was used by the Eastern Company in 1899 in reconstructing its track. While these roads were run under practically one management, it was a matter of arrangement between the companies after .the contract and sale was made. As such, the case falls within the decision in Southern Railway Co. v. Ensign Mfg. Co., 117 Fed. 423, 54 C. C. A. 591. And whether or not this is to be regarded as a contract completed between the claimant and the Omaha Company, there was no evidence introduced on the part of this claimant showing a diversion of any net income in favor of the mortgagee. The claim was therefore rightly rejected by the master, and the exceptions must be overruled. Claim of C. & D. Stern. This claim is for $805 for rent of a building at Quincy, 111., for November and December, 1899, and January, February, March, April, and May, 1900, and also for 32 wooden boxes sold in November, 1899, for $4.90, and for damages to a broken window 75 cents. The master has found that no proof as to the last two items was offered. The lease was made June 1, 1899, to the Eastern and Omaha Companies for one year, at a rental of $115 per month. During the occu — 565 — pancy of the building the rent.was paid upon the basis of 46 per cent, by the Omaha Company and 54 per cent, by the Eastern Company. The rent was all paid up to November 1, 1899, and they vacated the building November 7, 1899, offered the keys to the intervener, who refused to accept them. As there was no actual occupancy of the building after November 7, 1899, the only claim of intervener arises on breach of contract, for which no preferential right could arise. This was expressly so held in the case of Central Trust Co. v. Wabash Railroad Co. (C. C.) 32 Fed. 566, 567. The only basis for preferential claim could be predicated of the seven days of rent in the month of November, amounting to $26.84, which was properly rejected, in the absence of any proof of diversion. This exception is therefore overruled. Claim of Platte Overton. This claim is for $497.60 for ties, lumber, and fence posts furnished the Eastern Company in November, 1899. The other items of the account were paid. The unpaid account in favor of J. C. Duval & Co. the intervener claims was assigned to him. But the master held that the proof of such assignment was not satisfactory. It would be a sufficient answer to this claim to say that it was not filed until the 28th day of August, 1903, long subsequent to the time fixed in the order and decree of court for filing such claims. While the claimant has presented affidavit in explanation of the delay in presenting the claim, it furnishes no excuse in law. Equity favors the diligent. It is of great importance, where parties are undertaking to fix such liens upon the property purchased at foreclosure sale, that such claims should be promptly presented, so that the purchaser may have early" knowledge of what claimed burdens there are upon his purchase. Even if this objection were removed, there is an utter failure of any proof of diversion, and the claim was properly rejected. The exception is overruled. Claim of Handlan-Buck Manufacturing Company. This claim is for supplies furnished prior to the appointment of receivers, sold to the Omaha Company upon its order, amounting to $377.75. The master finds that they were necessary for keeping the Omaha Company in good condition, and when used it was as an operating expense. It appears that the claimant filed an intervention in the foreclosure suit against the Omaha Company in the Circuit Court for the Southern District of Iowa for the full amount of this sum, of which $168.51 was allowed as a preferential claim and paid. The balance of the account was disallowed. The court in that cause undertook by its decree to declare that the intervener was entitled to be subrogated to all the rights of the Omaha Company or the receiver thereof against the Eastern Company. So the claim is presented here. $209.28 of these supplies were in fact used by the Eastern Company in the operation of its road. The said decree of the Iowa court, if not extrajudicial, was clearly res inter alios acta, and cannot be recognized as binding in this proceeding. The claim was clearly inad-. — 566 — missible as preferential, for the reason that credit was not given upon the faith of the earnings of the Eastern Company, and there is no proof of any diversion. This exception, therefore, is overruled. Claim of Simmons Hardware Company. The claim of Simmons Hardware Company is for $442.36 for hardware supplies sold to the Eastern Company in December, 1899, and used on the road. The claim was rejected for lack of any proof of diversion made by it, and therefore the exception is overruled. Claim of Railway Supply Company. The facts in this case and the law applicable thereto are little different in principle from those presented in the foregoing case of Handlan-Buck Mfg. Co., and for the reasons assigned in the latter case the exceptions herein are overruled.